February 22, 2009

… We’re going to permanently stop production at this weblog on March 1, 2009. As Your Editor and his alter egos wind down the blawg formerly known as ethicalEsq, the f/k/a Gang is going to do what we’ve done since the spring of 2003: Focus our punditry on American Legal Fees [ALF], with our primary concern being not the welfare of lawyers but the interests of the client — especially, the “average,” unsophisticated or inexperienced buyer of lawyer services, who is often priced out of the marketplace or left with crushing debt after an encounter with a lawyer. [see our Fees Page for links to six years of posting on the topic; update: click for ALF #2 ; #3; and #4; plus our farewell fee opus “Understanding and Reducing Attorney Fees” (Feb. 28, 2009)]

In our last-days ALF Series, we’re going to try to be slightly less cynical than the cranky, mischievous, but goodhearted tv character Gordon Shumway, a/k/aALF (the Alien Life Form, who was created by Paul Fusco). We will, however, keep in mind this interchange with his earthly landlord and friend, Willie Tanner:

Willie: Some people are so blinded by the thirst for money, that it causes them to lose their values, and do things they shouldn’t do.

ALF: Well, that explains Ghostbusters II.

We think it also explains much of what is wrong with American Legal Fees and the relationship between lawyers and clients.

…. While bemoaning too-high fees and too-low morale in the legal profession, ethicalEsq, Prof. Yabut and I have been saying for years just how silly it is to scapegoat hourly billing as the primary cause of either client or lawyer discontent. Most of the things wrong with hourly billing are related to its abuse or to obscenely high hourly quotas imposed on lawyers by firms. We’ve pointed out, therefore, that nothing much will change if lawyers switch billing methods but insist on making just as much money. We’ve argued that each fee mechanism comes with its own anti-client incentives, noting that lawyers have found ways to manipulate every kind of billing scheme to produce fees that clients rightly consider to be excessive. [E.g., see our 2005 “chronomentrophobia” posting; and “broadening the hourly-billing debate,” Aug. 18, 2007, which includes excerpts from many prior posts; and see our 4-part essay on contingency fees.]

In response, we’ve gotten virtually no support among the profession, but plenty of ridicule and distortion from those who would like to kill hourly billing — often in order to make even more money. We’ve wondered when legal ethics experts and others with no financial stake would address this vital topic. Thanks to a chance stop at the Legal Ethics Forum this week, I finally discovered a few other thoughtful folks who are unwilling to join the hourly-billing lynch mob and blindly embrace all forms of alternative billing as problem-free solutions. It was no surprise at all, given our experience, that one of them was a Canadian law professor.

After seeing a much-emailed article in the New York Times about the waning billable hour, U. Calgary legal ethics professor Alice Woolley wrote “Demise of the billable hour again?” (Feb. 2, 2009). In that post, she points to the kinds of issues we’ve been talking about at length. Using larger words than our Prof. Yabut, Prof. Woolley says (emphasis added):

“I wonder about the fixation with the billable hour as a measure of lawyer’s value. While it has its obvious drawbacks, all billing methods are susceptible to the extraction of rents given the imperfections in the market for legal services. Moreover, lawyers moved to the billable hour for good reasons (more efficient allocation of risk) as well as more dubious ones (accounting firm indications that this would correct the lag in lawyers’ earnings). Why isn’t there more critical discussion of this?

Value-pricing pitchman Christopher Marston [Esq] responds to this call for more analysis with his usual blanket condemnation of hourly billing and refusal to admit there are any problems with fixed and value billing. In a comment, Marston says the profession should just kill the billable hour and “stop talking about it.” He offers this typical analysis:

“[people like himself] get that there is not a single customer that wants to buy an increment of our time. Increments are excrement.”

In her reply to Marston, Prof. Woolley notes that the history of the shift to hourly billing is unclear. As to the economics, however, she states:

“[W]hile economists may dispute the merits of time as an economic measure, it is not obvious what measure works given the inherent non-homogeneity of the ‘product’ lawyers sell. If I go to lawyer A for task B, and to lawyer B, for task C, what meaningful measure do I have to compare the ‘price’ charged by two different lawyers – whose skills may vary widely – for two different tasks – the inherent ‘value’ of which may vary widely . . . .”

“Further, if you use measures such as ‘value’ or ‘task’ payment, you still have the problem of information asymmetry, the credence good problem and the issue that, even ex post, it is not always clear whether the value received by a client arose from the skill of the lawyer or other factors – getting a good judge, having a case which even an incompetent fool couldn’t lose (or conversely, having a terrible judge).

In other comments to Prof. Woolley’s post, we are pointed to three recent blawg postings that deal thoughtfully with the hourly billing debate.

In “what’s the problem with the billable hour?” (Jan. 14, 2009), Lance Godard wrote that “in spite of all of its warts, [hourly billing] is still a pretty efficient way to compensate lawyers for their work.” He continues with insight and candor:

“Isn’t the real problem one of value, trust and service? When clients say they are unhappy with the billable hour method, aren’t they saying they feel like they’re paying too much for their legal services? That the perceived value of those services does not equal the cost they’ve been asked to pay? Legal services have to be paid for, and by-the-hour is a reasonable way to do it until you think your lawyer spends unnecessary time on your matter, or charges too much for her time, or isn’t telling you the truth when she says it will take 20 hours to resolve your problem. And if that’s the case, then the billable hour isn’t to blame.”

“Of course there are lawyers who pad their hours, who focus on the doing rather than on the result, who work day and night in the relentless pursuit of 2400 hours/year of client work. . . .

“But do you think those lawyers are going to go away or stop overcharging clients or stop wasting their clients’ money when the profession moves away from the billable hour? That the new billing methods will be completely transparent, that cost will reflect value, that no client will ever again wonder if she got her money’s worth? Who are we trying to fool? . . . The way the compensation is calculated changes nothing. If we believe that clients will get better legal advice, make better business decisions and be happier once the billable hour has been eradicated, we’re fooling ourselves.

“The billable hour isn’t the problem. It’s just a smokescreen. The problem is that clients no longer believe they are getting value from their lawyers. How are we going to fix that?”

“The real question is whether, overall, the total price approximated by billable hours is an acceptable surrogate for the value to the client. Bill [Henderson, his co-blawger] is free to chime in with hard evidence, but my intuition as a former buyer and seller is that the overall acceptability of the surrogate is indeed revealed by the overwhelming instance of its use in the market.”

After saying, “There’s no question that alternative fee arrangements work around the edges,” he poses “an example of a real problem” — companies looking for a way to make their pension plan obligations more determinate, but without going to defined contribution plans. Jeff explains and continues:

” The first prong of my thesis is that this is precisely the kind of mixed law and business problem on which law firms assist clients all the time, and it’s really difficult for either side to price the assignment by any method other than the billable hour. . . .

“The second prong of my thesis is that it’s not clients who hate billable hours, but the lawyers themselves. . . . I don’t think it has anything to do with billable hours per se, but with the fact that being an outside lawyer is a tough and exhausting profession (one that usually happens to pay pretty well) very often entered into by smart people with lots of fungible smarts, but without any particular passion for what they are doing. (Hence, the fact that well-paid lawyers are among the most prolific whiners in the charted universe!) The problem isn’t the billable hour, but the fact that the lawyer is only slightly more vested in the outcome or the business (other than by fear of failure) than the typical assembly line worker is in the car.”

“A truly radical approach to the practice would recognize that lawyers in big firms might well have more passion around the firm as a business if they had a meaningful stake in it as owners.”

I don’t know how to solve the malaise of so many lawyers. Merely switching to another billing mechanism is surely only the answer for a relatively few lawyers — and even fewer clients.

It is great to see thoughtful, knowledgeable people (with no apparent financial or emotional stake in the hourly-alternative billing debate) talking about these issues. I want to again urge legal ethics professionals to delve deeply into a lawyer’s ethical and fiduciary duties to the client when choosing and implementing various methods of billing for their services. Lawyers need more guidance on just what “reasonable fee” means. Scholarly articles, empirical studies, practice guides, continuing ed materials, and classroom discussion are all needed — along with more extensive blawging.

Finally, I’m going to leave you with excerpts from our post “time, fees, flu, pumpkins, too” (October 10, 2007), which summarizes many notions we’ve raised that are similar to those discussed by Prof. Woolley. The post starts by thanking the only other blawger I know who has been willing to talk back to (rather than merely echoing or parroting) the anything-but-hourly crowd over the past few years, Carolyn Elefant:

Thankfully, Carolyn Elefant again tries to focus on the most important issue: What do clients want and how do we best serve their interests? . . . Carolyn asks:

“If value billing benefits clients, then why do we lawyers need to sell them on it? Have clients become so entrenched in the billable-hour concept that they don’t realize that there’s a better way? Or is value billing another way for firms to charge more for the kind of value that as lawyers we’re obligated to provide anyway?”

We continued “time, fees, flu, pumpkins, too” by pointing out “a few important ideas for the law firm or law client to keep in mind, when thinking about the pros and cons of hourly billing and alternatives such as flat fee or value billing.”

Billing by the hour does raise the issue of law firms doing too much (being inefficient) because they earn more by doing more, but pricing in advance through a flat fee inherently creates the potential of doing too little for the client, since more effort won’t earn more money and less effort won’t (immediately, at least) reduce the size of a bill.

A too-busy lawyer or law firm (and the best almost always are too busy) has no particular incentive to do unnecessary work for a client when billing by the hour; but, a too busy lawyer has plenty of incentive to do less for a client when a fee is fixed in advance.

When an hourly-billing lawyer does extra (”too much” or perhaps “unnecessary”) work for a client, the result is often a better-written pleading or contract, or a better understanding of precedent; when a flat-fee-billing lawyer does “too little” (cutting corners or eliminating tasks), the result is very likely to be lower quality work product and possible injury to the client’s interests.

As always, it is important to distinguish condemnation of high billable hour quotas for each attorney, which are set by law firms, and which raise many ethical red flags, from billing by the hour, which is not inherently unethical. And,

What might be good or fair for savvy clients, who have lots of experience with lawyers and legal problems and offer the potential for significant repeat business, may not be automatically fair for clients who have little relevant experience and, therefore, may have no real idea how much work is required, what a reasonable fee would be, how difficult or unusual their situation is, nor how qualified a law firm is to handle the matter. In many situations, they also won’t be better able to judge the quality or value of the services even when they are completed.

One tip for prospective clients: If a flat-fee or value-billing lawyer, who wants to be hired by you, is only telling you the good things about alternatives to hourly billing, and only the bad things about paying by the hour, you should think long and hard about whether you are dealing with a trustworthy lawyer who puts your interests first. If he or she won’t give you an estimate of how much actual lawyer time will be put into your matter, run.

The economics, ethics and practicalities of billing for lawyer services should never be seen as yes-or-no propositions. Far too much depends on the factual circumstances and on the traits of the people involved (lawyer and client). By constantly attacking and deriding anyone who points out that there are pros and cons to every billing method, those with a stake in killing the billable hour are trying to create a forced binary choice — one that is likely to hurt those with the least power in the marketplace for legal services: the unsophisticated (or un-wealthy) client and the inexperienced and easily-replaced young attorney.

6 Comments

I read your article with interest – as we are an accounting firm with an aversion to time sheets and an enthusiastic supporter of value priced billing for accounting firms. Our experience shows most accounting firms undervalue rather than over value their services.

A client was recently involved in two property transactions and the legal firm concerned kindly provided with a “value priced quote” that was some 20-25% higher than competing firms. The letter explained what they would be doing (a simple sale & purchase in each case with no financing) but at no point indicated the value to the client. The “what’s in it for me” is what supports the price not how is it done.

This resulted in increased client disenchantment. They know that there is very limited partner involvement (if any) in these standard transactions and yet appear to be levied at partner hourly rates. Learning to look at it from the client perspective and seeking client feedback would be a huge advancement.

Thanks for taking the time to tell us your perspective and experience, Margaret. Looking at a situation from the client’s perspective and seeking client input is a necessity — but, not in order to charge more than we believe is fair for our services.

I do not believe your business context is very relevant to the sort of legal clients that interest me most — individuals who must solve personal issues like divorce, home purchasing, personal injury, criminal accusations, etc. A lawyer should not ask such persons to put a dollar figure on “what’s in it for me” and should not be trying to extract every possible dollar. We are a service profession, not business partners of our clients.

By the way, there is no excuse for a firm trying to sneak partner level fees for standard work that will be done by junior attorneys.

David: thanks for including me in your analysis. Appreciate too your thoughtful post, which helps move the debate from “let’s beat up the billable hour” to “how can we ensure that clients are getting value.”

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